How Much of Your Social Security Benefit Will You Pay in Taxes
Category: Financial and taxes in retirement
Note: This article compiles information from a Social Security Office or Retirement and Disability Report: Taxation of Social Security Income. Note that we are not tax professionals – consult your accountant or other expert before you make any important decisions on this issue.
December 18, 2015 — Many of our members are either not aware that they might have to pay taxes on their Social Security benefits, or if they are, not sure how much they might have to pay. This article will try to shed some light on the issue.
Social Security beneficiaries with total income exceeding certain thresholds have been required to claim part of their Social Security benefits as taxable income since 1984. The income thresholds for taxation of benefits have remained unchanged since Congress first established them but, because wages have increased, the proportion of Social Security beneficiaries who must pay federal income tax on their benefits has risen over time. In 1984, less than 10 percent of beneficiaries paid federal income tax on their benefits. A Social Security Administration (SSA) microsimulation model, Modeling Income in the Near Term (MINT), projects that 52 percent of families receiving Social Security benefits will pay income tax on their benefits in 2015. Most of these families will be in the upper half of the total-income distribution. Some 13 states also tax Social Security income, which is not discussed here.
For 2015, beneficiary families will owe a median of less than 1 percent of benefits in income tax, but one-fourth of those families will owe 11 percent or more of their benefits in income tax. The model projects that the median percentage of benefits owed as income tax by beneficiary families will eventually rise to about 5 percent. Among the 52 percent of families that are projected to owe federal income tax on their Social Security benefits in 2015, the median share of benefits owed as tax will be 11 percent, rising to 12% by 2050.
So how much do you have to pay in federal income taxes on your Social Security benefits?
The formula is not that easy to explain. This link provides a chart from the SS report that explains the formula for calculating taxable SS income. Here is a simplistic view of the elements in that formula:
Single filers with modified Adjusted Gross Income (AGI) below $25,000 pay no tax. Those with modified AGI from $25,000 – $34,000 pay taxes on the lesser of 50% of benefit income or the amount of AGI over $25,000. Those with modified AGI over $34,000 will pay taxes on as much as 85% of benefits.
Married filing jointly will see no portion of their benefits as taxable with modified AGI below $32,000. Above that there are 2 tiers of taxation, with taxes on either 50% or 85% of benefits.
If you can figure out your modified AGI (Adjusted Gross Income) once you retire you will be able to estimate what you might have to pay in federal income taxes on your Social Security benefits. This link provides a definition of AGI. Generally, modified adjusted gross income is your adjusted gross income plus any tax-exempt Social Security, interest, or foreign income. To complete the analysis you also have to know how much your SS benefits will be. To figure out that part of the equation, here is a link to the SS Administration’s Benefits Estimator. If you are still unsure, ask your tax professional to estimate it for you.
Bottom line
There is one important thing to remember from all this: you might not be able to count on spending all of your SS benefits income – if your other income is high enough some of it might go to pay taxes.
Comments? Many people believe that Congress should modify the thresholds for benefits taxation, since so many more people are affected as their benefits creep up with inflation. Others believe that this is progressive taxation and should be allowed to happen. What do you think? Are you paying taxes on your benefits – were you surprised either way? Please share your thoughts in the Comments section below.
Comments on "How Much of Your Social Security Benefit Will You Pay in Taxes"
Jim Williams says:
I pay at least $1000 a year in income taxes above and beyond my what is withheld from my paycheck. I get about $2100 a month in social security and earn $10 an hour at Wall Mart. I was amused to read that most families who pay taxes on their social security are "in the upper half of the total-income distribution."
Gene S says:
Keep in mind that the IRS expects to receive and hold 90% of taxes owed them throughout the year. You can't just collect your income tax free and pay the taxes owed at tax time. If you do this, the IRS will charge interest penalties for all months where they did not have 90% of the tax due them and give you a $250 fine for not knowing the rule. Check with your tax professional or the IRS for the current rules on paying taxes to avoid any penalties. The IRS has Form 1040ES to help you determine the amount of tax that you should be withholding or making in estimated payments. Also keep in mind, withdrawing amounts from your retirement accounts throughout the year could end up bumping you up to a higher tax bracket resulting in even more taxes owed. I am NOT a tax professional, nor do I claim to be, so be sure to check with your tax professional or the IRS for the current rules on paying taxes to avoid penalties.
boB says:
Progressive taxation is one of the biggest scams the government uses. They do it with the AMT as well. This way they don't have to take on the public ire over the tax raise until they are long gone. Don't let the government throw this curve past you. Let them know you know all about it and won't tolerate it!
Stephen says:
I grew up in Virginia, was hired by the Feds in 77, just two years out of high school, and pre-84, so don't have any Social Security benefits. I changed my residency to FL in 2002 and retired to FL in 2012 partly because they do not tax pensions. Virginia thinks they're doing folks a favor by not taxing Social Security benefits, but since I don't have any, my Federal pension - and those also under CSRS - is fair game to them. This is something of a cash-cow for Virginia since No. Va. is heavy with Federal employees. This is something my ex overlooked when denied she ever had, or intended to have, Florida residency when she filed for divorce from Virginia in an attempt to get a more favorable outcome for her: at "least 50%." She got the Federally-mandated pro rata portion (less than 50%) and, oopsie, has to pay Federal AND Virginia taxes on it.
Tom says:
Here is a handy online calculator for figuring SS taxes:
https://www.calcxml.com/calculators/how-much-of-my-social-security-benefit-may-be-taxed?skn=#top
Kathleen Quinlan says:
I recently moved from VT to VA,, I am on disability. I get a monthly check. In VT I did not have to pay for Medicare as Medicaid paid for it. However, in VA they denied that to me so now I am paying $104.00 per month for Medicare. I also was turned down for food stamps as I make over $750 per month... I do not have a pension, nor any retirement as the places I worked for did not have benefits. I am divorced and on my own. It is a struggle..If they tax my Social Security , I maybe close to the streets.. This is just not acceptable.. There has to be something we all can do . No cost of living raise this year and not the first year this has happened. Even if I was not disabled, tell me where the good jobs went to? I am 58 years old,last time I heard of "Benefits" in a job was when I was 18.
Bob says:
Like most things this is difficult. The government does not have any money of its own. Everything is paid for with taxes. Not enough taxes and what happens? Nearing 18 trillion dollars of National Debt is what happens! Nearly every state and city virtually bankrupt is what happens. For some reason people think they should get a free ride, but remember "they is no free lunch". That includes the various parts of Medicare. Part A is free. Part B is not, but no one is forced to take it. But then how are you going to pay for the doctor bills. Then to top it off, it only pays for 80% so we have to buy supplemental to pay for the other 20%. Most people who get to retirement age and are broke are broke because they have made bad choices in life. So are they supposed to be rewarded for making bad choices by having the rest of us pay for them? That would mean the rest of us are being penalized for making good choices, so no! Remember, there is no government money, so don't say the government is paying for it. Then there is the problem that our government pretty much waste our money. Just think what could have been done here in the USA for that over a trillion dollars and rising for that stupid war in the Middle East that Bush got us into! So people get the attitude that they don't like the way our government spends our tax dollar so they don't want to pay taxes. I don't blame them, that is why I want to pay the least amount possible too!!
The solution? There is none. The only one would be to greatly increase taxes on the rich and on the big corporations, many of whom pay none through loopholes created by their friends in congress, and for our government to stop spending our money in other countries. That is not going to happen. Voting changes nothing. All first world countries are getting flooded with illegal immigrants from the third world countries, so the future is all third world countries. We are doomed.
Terrie Douglas says:
Kathleen Quinlan: I just used the calculator here:
https://www.calcxml.com/calculators/how-much-of-my-social-security-benefit-may-be-taxed?skn=#top
and if you make say $2000 a month with SS and have no other income, you fall into the 15% tax category. However, Federal tax liability on your SS income will end up being $0. So I wouldn't worry about that too much. SS income is taxed at a much lower rate than other income according to this calculator. Of course it will solely depend on the amount of your SS income.
Terrie Douglas says:
Bob - True many have made bad choices, many have taken risks that didn't pay out. Some of us (ahem) lost everything in the last few stock market busts, mine mostly from after 9/11, 2001 and more recently in 2008/2009, and we haven't had time enough to rebuild the amount lost. Maybe it was bad choice in keeping up that 401k offered by my employer(s) that I ended up losing all of because of the market. Social security is not a hand out, it is money that we all have paid into all of our working lives. It was designed to be like a savings account for us to then be able to draw from at retirement age! It started because more and more companies stopped having pension funds for their people; it gave everyone a chance to have some income upon retirement. The fact that everyone seems to believe SS is a government handout is ridiculous!! The fact that our government has 'borrowed' from the SS fund and not paid anything back into it, obviously, is not fair or right either. Yes those working today are paying into SS and when they reach retirement age, if the government hasn't 'borrowed' it to nothing, will also draw on what they have put i; and yes at that tie those working will be the ones supporting it. Yup, indeed some of us made bad choices. I do agree that large corporations and those that make more than $250k a year should pay more in taxes than they do. I am all for a flat tax of 10% across the board both individuals and corporations, that would take care of most everything and make a huge dent in our deficit. ;) Course would prefer they leave the tax laws for SS income untouched.
ella says:
If our only income is $2,000 of social security benefits per month, we are in bad shape!
My husband and i have never been big wage earners, yet have put money in our IRA's and 403B plans every year (always the max for IRA's and often for our 403Bs as well). Living frugally and saving has been a choice we have made.
At this time, the gov't requires that we withdraw money from my husband's accounts every year is he is retired and over 71 1/2 years old. You can be sure that increases our adjusted gross income (AGI), and our social security income is taxed correspondingly. I had hoped this would change upon retirement, and it will to some extent; but the $ coming out of his accounts will minimize that change. And when i hit 71 1/2, the $ coming out will be equal his salary and be higher than mine ever was.
I am writing all this to give readers an understanding of how the taxation of social security income has occurred in my household and will occur in others. I had hoped it would go way down upon retirement, but this is not the case. It all depends on AGI. The gov't doesn't care where the $ comes from; they just want their taxes!
Gregory Matthews says:
Just finished Florida taxes, first full year completely in state, and am having a tough time getting Arkansas to quit taxing my teachers retirement pension. Anyone "been there, done that" that has pointers? I've got the legal 'scripture and verse' saying they shouldn't but having a problem getting results. Just doesn't seem right since I'm not in Arkansas anymore.
SandyZ says:
Gregory - just went through this with my Maine teacher pension. We moved to South Carolina this past year. Our tax advisor here also agreed that in 2017, our first full year in SC, I should not be required to pay Maine state tax. He called the state of ME tax office and they discussed the situation in financial language, which I do NOT speak. Result- Maine tax rep agreed with our SC advisor that according to the law, I do not continue paying ME tax in 2016. Our advisor took her name and asked her to confirm in an email to him. You might consider going this same route with a tax advisor in your area. It is going to save us a bundle this year. Good luck!
SandyZ says:
Sorry 2016 is our first full year in SC! Let's not move that clock too fast!